Stephen A. Schwarzman, a co-founder of Blackstone, took home the largest haul last year: nearly $800 million. He and other private equity executives receive more annually than the leaders of Facebook and Apple, companies that revolutionized the way society communicates.
The top executives at those six publicly traded private equity firms earned, on average, $211 million last year — which is about what Leon Black, a founder of Apollo, received. That amount was nearly 10 times what the average bank chief executive earned, though firms like Apollo face less public scrutiny on pay than banks do.
Private equity firms note that much of their top executives’ wealth stems from owning their own stock and that they have earned their fortunes bringing companies back to life by applying their operational and financial expertise. Hostess, a defunct snack brand that was quickly returned to profitability, is a textbook example of the success of this approach.
Yet even as private equity’s ability to generate huge profits is indisputable, the industry’s value to the work force and the broader economy is still a matter of debate. Hostess, which has bounced between multiple private equity owners over the last decade, shows how murky the jobs issue can be.
In 2012, the company filed for bankruptcy under the private equity firm Ripplewood Holdings. Months later, with Ripplewood having lost control and the company’s creditors in charge, Hostess was shut down and its workers sent home for good.
Without investment from Apollo and Metropoulos, Hostess brands and all those jobs might have vanished forever after the bankruptcy. The way these firms see it, they created a new company and new jobs with higher pay and generous bonuses.
But the new Hostess employs only 1,200 people, a fraction of the roughly 8,000 workers who lost their jobs at Hostess’s snack cake business during the 2012 bankruptcy.
The collapse and revival of Hostess illustrates how even in a business success, many workers don’t share in the gains. The episode also provides a snapshot of the economic forces that helped propel Donald J. Trump to the White House.
Since losing his job at Hostess in 2012, Mark Popovich has had three jobs, including one that paid about $10 an hour, half what he made at the Twinkie-maker. A lifelong Democrat and devoted “union man,” Mr. Popovich said he supported Mr. Trump, the first time he ever voted Republican.
“It’s getting old, getting bounced around all the time,” said Mr. Popovich, a 58-year-old Ohio resident.
Such frustrations stem from broader shifts in the economy, as all types of companies turn to automation to cut costs and labor unions lose their influence. While these changes have helped keep companies profitable, private equity has used these shifts in the workplace to supercharge wealth far beyond that of the typical chief executive.
And yet, Mr. Trump did not focus on private equity on the campaign trail, instead blaming the plight of the American working class on a shadowy cabal of elitist Democrats and Wall Street bankers who support trade deals that ship jobs overseas.
“People understand jobs going to China,” said Michael Hillard, an economics professor at the University of Southern Maine. “But no one has ever heard of these private equity firms that come in and do all this financial engineering. It is much more complicated and less visible.”
The industry’s trade group, the American Investment Council, says it is sensitive to these issues as private equity’s role in the economy expands. The industry now controls huge swaths of the American work force: 4.4 million employees at over 7,500 companies, according to PitchBook, a private financial data platform. By some measures, Blackstone is one of the nation’s 10 largest employers and one of its biggest landlords. The firm’s co-founder, Mr. Schwarzman, is advising Mr. Trump on job creation.
“At a time when many Americans are concerned about the country’s economic viability, private equity has proven itself in communities throughout the United States as an effective solution,” said James Maloney, the American Investment Council’s spokesman. “Sustainable growth strategies, adherence to responsible investments and a long-view approach are all a part of the present-day private equity model.”
The Times investigation of the Hostess deal shows that today’s private equity also uses another set of tactics, like special dividends and tax arrangements, that maximize profits in creative, yet financially risky ways.
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Since the financial crisis, the private equity industry has become hugely influential. Here’s how it plays out in your daily life.
A year after the layoffs at the Hostess plant in Illinois, Apollo and Metropoulos arranged for the company to borrow about $1.3 billion. Apollo and Metropoulos used most of that sum to pay themselves, and their investors, an early dividend on their investment.
The firms also found a way to make money even after the company was sold. The firms, The Times investigation found, struck a deal to collect as much as $400 million over the next 15 years, based on what Hostess’s future tax savings might be.
These winnings do not come without risk to the private equity firms, which are often taking a gamble on troubled companies, and when they fail, the firms probably lose out.
And this is not a simple story of powerful investors enriching themselves while some workers struggle. Teachers and firefighters also benefit from private equity.
Pension funds that pay retirement benefits to public servants now depend on private equity to generate huge returns. Without it, taxpayers could bear more of the costs.
“Hostess’s comeback was a win-win-win-win,” an Apollo spokesman said in a statement, adding that its investment benefited workers, communities, investors and consumers. “After teaming up to take on the daunting financial and operational challenge of creating a new company around the Hostess brand, Apollo and Metropoulos & Co. completed a highly successful private equity investment.”
On a more basic level, Americans enjoy what private equity has owned: GNC vitamins, affordable jewelry at Zales, and birthday parties at Chuck E. Cheese’s.
Hostess’s new owners rode a wave of nostalgia for the company’s snack cakes, a euphoria that even spread to a sprawling Long Island estate. At a wedding there in 2013, packaged cupcakes were offered to guests.
It may seem an unusual choice, but this party had a special affinity for the snack cake. The bride’s father is an executive at Apollo.
The ‘Secret Sauce’
Leon Black grew up in a family that had a home in Westport, Conn., and an apartment on Park Avenue in Manhattan. He attended Dartmouth and Harvard Business School.
But when Mr. Black traveled to Lubbock, Tex., to speak to a group of retired teachers, he emphasized a humbler side of his pedigree.
“You should know,” Mr. Black said, according to a video recording of the February 2012 meeting, “my mother was a teacher, my sister was a teacher, my brother-in-law is a teacher. We have a lot of teachers in our family.”
Mr. Black had good reason to flatter the retirees: Pension funds for teachers and other public workers are some of the biggest investors in Apollo’s funds and have helped make Mr. Black a very rich man.
Mr. Black, or an affiliated limited liability company, owns homes in Beverly Hills, Miami Beach and several locations in New York, an analysis of real estate records shows. This year, he bought the $38 million house in Beverly Hills that had belonged to the actor Tom Cruise.
Private equity’s relationship with pension funds is mutually beneficial. As countless baby boomers reach retirement at a time of historically low interest rates, public pension funds need to achieve returns that match their liabilities — and private equity has delivered.
Nearly half of private equity’s invested assets now come from public and private pensions around the world. Private equity uses this pension fund money to place bets on companies like Hostess, and Texas teachers have shared in the profits from the deal.
The Teacher Retirement System of Texas has invested in the fund that bought Hostess. And that fund has reaped 27 percent net during the three years it owned Hostess, significantly more than the stock market returned in that period.
“You need to get people in whom you trust and who will keep up our fund,” said Fran Plemmons, a former president of the Texas Retired Teachers Association who was a teacher and principal for 25 years. “If they do that, you need to get out of the way.”
Ms. Plemmons said her $31,200 yearly pension allows her to live modestly but comfortably. High returns from private equity investments, she said, help keep pension payments flowing to retired school workers across Texas, which trickles down into the local economy.
For the teachers in Lubbock, Mr. Black described the “secret sauce” behind its success: buying the debt of financially troubled companies or purchasing an entire company. The investments, he said, are “value-oriented, if not contrarian.”
Hostess fit that formula.
Not only were Americans turning to healthier snacks and eating less junk food, but Hostess had its own challenges.
In 2012, the baking company had gone through a bruising bankruptcy, its second in a decade. The company laid off most of its 18,500 unionized drivers, loaders and bakers, not long after the bakers’ union voted for a companywide strike rather than accept another round of concessions.
THE RICH HISTORY OF TWINKIES
But what was disaster for previous owners looked like treasure to Apollo and Metropoulos.
When Hostess lenders auctioned off the company in early 2013, Apollo and Metropoulos bought some of Hostess’s snack cake brands, which included Twinkies and Ding Dongs.
Snack cakes still produced some of the highest profit margins in the food industry and Hostess cakes were particularly well-known. The bankruptcy also provided Apollo and Metropoulos a clean slate, liberating them from union contracts, labor rules and debt and pension payments.
One group of workers who had no place at the new Hostess: the unionized drivers, who transported snack cakes and bread to grocery stores nationwide.
Now, Hostess would send its baked goods to warehouses, where retailers like Walmart would ship to individual stores.
Ronald Litland, 44, delivered Hostess products in Illinois for 10 years. After he was laid off in 2012, he enrolled in a for-profit college in hopes of finding a new career in information technology. When his unemployment benefits ran out, he delivered pizzas. He never finished school, but is still paying back student loans and taking care of his son.
“I have a hard time making ends meet,” said Mr. Litland, who earns about $24,000 a year.
Like the drivers, Hostess’s baking operation was also cut back. Apollo and Metropoulos chose to buy only a handful of its roughly one dozen snack cake bakeries.
Other parts of the former Hostess baking empire were scaled back as well. Food companies picked off some of Hostess’s bread brands, but reopened only a small fraction of the bakeries.
Before being laid off from Hostess, Mr. Popovich made about $20 an hour. Every year, he went on vacation in the Bahamas or St. Martin. His health insurance covered the $385,000 cost when his wife needed major surgery.
“I lived a good life,” said Mr. Popovich, whose most recent job driving a forklift at a solar panel plant paid about $16 an hour.
Mr. Popovich is also entitled to a pension, which he was promised after working more than two decades at Hostess. But he recently received a letter at his home in Toledo, Ohio, warning that the pension fund was nearly insolvent.
Apollo and Metropoulos are not obligated to contribute to the pension fund, which is managed by a labor union. Nor do they have to pay the severance that Hostess was obligated to pay Mr. Popovich when he was laid off. Those liabilities were wiped out in the bankruptcy.
New Shoes and Dashed Hopes
At a brick bakery in Schiller Park, Ill., Twinkies started rolling off the line nearly a century ago. And when Apollo and Metropoulos bought some of Hostess’s cake plants and brands out of bankruptcy in 2013, Schiller Park’s plant was one of the fortunate few to reopen.
“Schiller Park, We ♥ You,” read a billboard that Hostess sponsored in the town, the heart carved into the image of a half-eaten Twinkie.
The celebration was short-lived. Just over a year after the plant’s grand reopening, Hostess shut it down.
The fallout was swift. All 415 employees were fired, some for the second time in two years. Schiller Park lost one of its largest employers, creating a ripple effect through this tiny working-class suburb of Chicago. The plant itself, an institution so old that it predated nearby O’Hare International Airport, was suddenly vacant.
“We got our hopes up again,” said the town’s mayor, Barbara J. Piltaver. “And then all of a sudden, we had a big hit.”
The story behind the rise and fall — and fall again — of the Schiller Park plant encapsulates private equity’s relationship with workers and labor unions.
It’s a complicated issue. A prominent study of investments across the country concluded that private equity has increased productivity while leading to a minor overall decline in jobs relative to the broader economy. Private equity’s trade group says its own analysis of county demographicsfound that private equity investment increases jobs growth in local economies, though the data was limited.
In Schiller Park, Janice Ryan worked at the Hostess plant for about 20 years before the 2012 bankruptcy. She walked to work from her nearby home. And she was relieved to return, after several months of unemployment, to be part of what many workers believed was the company’s long-term comeback.
Schiller Park was a starting point for getting Twinkies back on the shelves by summer 2013. As part of that push, many Schiller Park employees worked 12-hour shifts, six days a week, and could volunteer for a seventh day.
“We were all proud of what we accomplished,” said Michael Spina, who worked for Hostess for many years in St. Louis and then moved to Schiller Park to help manage production when the plant reopened.
What the workers were never told, however, was that Apollo and Metropoulos had no plans to keep Schiller Park in operation over the long term.
“Schiller, in essence, was a contingency plan, opened only to ensure that initial demand could be met,” Hannah Arnold, a Hostess spokeswoman, said in a statement. She added that the setup of the bakery — its low ceilings and lack of a loading dock — was not conducive to the company’s future plans. The company says it could not tell workers of its plans because of labor rules.
The expendability of Schiller Park reflects Apollo and Metropoulos’s plans to run a more efficient operation than their predecessors did. And that model requires far fewer workers than the one that existed for decades.
In 2012, Hostess had about 8,000 employees and eight bakeries dedicated exclusively to snack cakes. Six other plants produced at least some desserts. Today, the new Hostess has only three plants and 1,200 workers.
At Schiller Park, some workers earned a dollar less per hour than what workers were paid under the previous owners. Others earned more, the company said. Still, they qualified for bonuses, owed no union dues and received health insurance and dental care. Instead of pensions, they were enrolled in 401(k) plans.
“Bakeries are hot places,” Mr. Spina said. “But Schiller Park could really be a hot son of a bitch.”
Veronica Pacheco, who lives in Schiller Park and joined the Hostess bakery when it reopened in 2013, described “freezing” wintertime conditions that were equally arduous. She said she wore scarves and heavy gloves under her work garments.
Ms. Arnold, the Hostess spokeswoman, noted that prospective employees answered a questionnaire about whether they were willing to work in “extreme seasonal temperatures.” The company said it spent about $100,000 upgrading the heating and air-conditioning system, but stopped short of a total overhaul.
There were other hazards as well. In 2014, Todd Kemp was injured after heaps of Twinkie mix spilled on the factory floor, causing him to slip and injure his shoulder, back and knee. He has since had four operations.
Ms. Arnold said Apollo and Metropoulos inherited old equipment, some of it in disrepair, adding that Schiller Park “was in the worst condition of the four bakeries by far.”
C. Dean Metropoulos, the billionaire Greek immigrant whose firm has invested in other well-known food brands like Vlasic pickles and Pabst Blue Ribbon beer, personally oversaw the upgrading and cleaning of the facility, Ms. Arnold said.
“He also focused on ensuring workers had new uniforms and better shoes, to make long days standing more comfortable,” she said.
Over the long term, Apollo and Metropoulos looked outside Schiller Park to generate profits.
Hostess employed “extended shelf-life technology” to make the Twinkie, already jokingly thought to be capable of surviving nuclear war, even more everlasting.
The company perfected its secret recipe until it contained the right amount of enzymes to better retain moisture. The enzymes extended shelf life of some products to 65 days from 26 days.
The company also turned to automation. At a plant in Emporia, Kan., Hostess installed an automated baking system that churned out more cakes with fewer workers.
William Toler, Hostess’s chief executive, said the company spent more than $140 million “to get the business up and running, and certainly our results suggest we made very good choices.”
The Hostess plant in Columbus, Ga., had another advantage: government subsidies. The state’s economic development agency provided Hostess with tax credits to push along the deal. The Town of Columbus chipped in a $1 million grant to award Hostess for creating jobs.
“We’re not doing it to be nice guys, we’re doing it to create jobs,” said Wylly Harrison, who worked on the deal for the Georgia Department of Economic Development and said that the state was thrilled Hostess came back.
Hostess said it also received incentives from Emporia, the State of Indiana and the City of Indianapolis. Employment totals at those plants have since increased.
Hostess did not receive any incentives in Illinois.
Three workers interviewed by The Times said they believed that the final straw for Schiller Park was when they voted to rejoin a union.
Hostess fought the effort. The company plastered the plant with posters urging workers to vote “no.”
The union prevailed, but not for long. Around the time union officials had planned to start contract negotiations in August 2014, Hostess announced it was shutting down the Schiller Park plant.
Ms. Arnold, the Hostess spokeswoman, said the unionization vote did not factor into the decision to close Schiller Park. Employees, she said, were provided severance and an opportunity to apply for a Hostess job in another state.
Union officials declined to comment.
Since then, unions have made limited inroads at Hostess. Whereas 83 percent of the work force was unionized in 2012, Hostess recently said in a securities filing that about 30 percent of employees belonged to a union in Indianapolis and Columbus. Its flagship facility, Emporia, is not unionized.
“Both Apollo and Metropoulos have owned and operated numerous companies that had union employees,” Ms. Arnold said, adding that “Metropoulos has always enjoyed good, working relations with unions and their members.”
The Money-Making Machine
For all the profits Apollo and Metropoulos squeezed out of the Hostess factories, a deal hatched in a hotel room on Fifth Avenue in New York shows how private equity can have its snack cake and eat it, too.
There, in the Versailles Room at the St. Regis, Apollo and Metropoulos began the process of extracting returns from the company, less than a year after shutting the Schiller Park plant.
Most investors seeking profit have to wait for the right moment to sell a company or take it public. But private equity uses a different playbook.
First, Apollo and Metropoulos arranged for Hostess to borrow money from the banking giant Credit Suisse. The two firms then pocketed about $900 million of that money for themselves and their investors. Hostess, meanwhile, is stuck repaying the debt.
This type of deal is known as a dividend recapitalization, and it is a staple of private equity’s money-making strategy. These deals provide private equity firms an opportunity to profit before they even sell a company, an added bonus to the firms and their investors, including public pensioners.
Since 2012, private equity firms have arranged hundreds of such deals, totaling over $148 billion in debt, according to Thomson Reuters. Hostess’s dividend deal was the third largest of 2015.
This financial engineering is crucial to private equity’s success — and to building the personal fortunes of the industry’s executives. With each dividend recapitalization, more money pours into Apollo, which then flows to the firm’s executives.
It comes with risks. Of all the companies that carried out dividend recapitalizations since 2012, about 10 percent have faced a credit rating downgrade within six months of the deal, according to LCD/S&P Global Market Intelligence and Standard & Poor’s Ratings, which notes that many factors could lead to a downgrade, including excessive debt.
Although Hostess has not been downgraded, it now describes itself in public filings as “highly leveraged.”
Mr. Toler, the Hostess chief, said that even after the dividend payout, the company “had plenty of capital to work with.”
At the same time it was paying dividends to investors, Hostess earmarked $8 million to pay bonuses to workers, including those in the bakeries.
A few months after the dividend deal, Apollo and Metropoulos entered into negotiations to sell the company. Instead of being sold outright, Hostess would be acquired by a shell company, created by another private equity firm, the Gores Group.
And still, they arranged more ways to profit. Apollo and Metropoulos retained a combined 42 percent stake in the company, which is now publicly traded.
After investing only $186 million in cash when they bought the company in 2013 (they took out debt to help finance the rest of the $410 million deal), Apollo and Metropoulos’s investment is now worth 13 times that initial cash investment.
Tracing how these enormous returns wind their way into Mr. Black’s pocket is a byzantine task.
Mr. Black collected a $100,000 salary and no bonus in 2015.
How did Mr. Black, on such a relatively modest salary, come to acquire an art collection that is said to include one of Edvard Munch’s “ Scream” series, which he bought in 2012 for about $120 million, then the highest price ever paid for a painting?
The answer is that Mr. Black and other private equity executives make their money in ways that set them apart from most other industries.
Mr. Black’s share of the Hostess profits, from the partial sale and the $900 million in cash they pulled out of the company, will be reflected in a series of distributions he collects from Apollo’s publicly traded stock. The size of the distribution depends on the size of the profits from deals like Hostess.
Last year, Mr. Black’s distributions totaled $181 million.
Other shareholders in Apollo — which include money managers like Fidelity — also receive these distributions. But Mr. Black, as the largest shareholder of a company he co-founded in 1990, gets the largest payout.
While Mr. Black receives the most money at Apollo, one of his partners and co-founders, Joshua Harris, took home $121 million last year. Mr. Harris is part owner of the Philadelphia 76ers and the New Jersey Devils.
Mr. Black has noted that if Apollo’s investments fail to make money, then its executives also miss out.
Like most private equity firms, Apollo collects a management fee from investors and earns 20 percent of profits from the firm’s investments, once its investors recoup their original money and reap profits of their own.
Private equity’s advantages don’t end there. Apollo’s share of the profits on Hostess or any deal ultimately flows to Mr. Black and his fellow shareholders in the company in ways that lower their tax burden.
The industry’s 20 percent cut of profits — also known as carried interest — is taxed at a long-term capital gains rate that is roughly half the 40 percent ordinary income rate for the nation’s highest earners. And since private equity executives receive much of their money from carried interest — or in the case of Mr. Black, distributions largely made up of carried interest — they enjoy a tax advantage over workers.
This is what’s known as the “carried-interest loophole” — a tax treatment held up during the presidential campaign as evidence that the rich fail to pay their fair share.
Private equity managers argue that this treatment is not a loophole or even unique to private equity. Its use originated from the cut of profits that ship captains reaped for “carrying” goods.
In the Hostess deal, Apollo and Metropoulos found even more ways to use the tax code to their advantage.
The firms are entitled to collect a large portion of tax benefits that Hostess could earn well into the future. The idea is that by selling a stake in Hostess before they could realize these benefits, Apollo and Metropoulos could leave money on the table.
These arrangements, which are now commonplace in private deals, allow the firms to collect cash from a company they may no longer own.
The Hostess “tax-receivable” benefits, according to previously unreported securities filings and estimates by the Apollo spokesman, could provide Apollo and Metropoulos up to $400 million for the next 15 years or more.
Looking out over those next 15 years, nothing seems guaranteed to Mr. Popovich, the former Hostess worker from Toledo. Right before Thanksgiving, Mr. Popovich was laid off from his most recent job at the solar panel plant.
The idea of searching for work at age 58 is daunting. He has been sending out his résumé, but has not received a call back.
“It’s been four jobs in four years,” he said. “Here we go again.”
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